Tuesday’s analyst upgrades and downgrades

The Canadian telecom and cable sector could continue to helped by underlying trends, supported by a “resilient” wireless market, in 2019, according to Desjardins Securities analyst Maher Yaghi.

However, in a research report previewing the calendar year ahead, Mr. Yaghi warned that average billings per user (ABPU) growth is likely to be “muted.”

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“For 2019, we forecast industry revenue expanding by 3.5 per cent, with EBITDA increasing by 4.2 per cent (vs our expectation of 4.5 per cent in 2018) as margins improve on continued cost containment and as companies focus on offering higher-end products,” the analyst said. “For 2020, we expect revenue growth of 3.0 per cent and EBITDA growth of 3.7 per cent. For 2018, current consensus for EBITDA growth is 5.1 per cent after nine months of results.

“While regulatory risk exists, we do not expect major changes or new policies that would alter the competitive dynamics in the industry to be initiated in the short to medium term. In this comment, we discuss the key drivers that will be important for investors to track, including the 600MHz spectrum auction and wireless ABPU growth given increased competition. As always, long-term interest rates will be a driving force when it comes to overall sector performance.”

Pointing to its current valuation, Mr. Yaghi raised his rating for shares of Shaw Communications Inc. (SJR-B-T) to “buy” from “hold.”

“We downgraded SJR two years ago in December when the stock was trading at the highest multiple among its peers, with a premium of 0.5 times enterprise value-to-EBITDA versus the average,” he said. “Fast forward two years and the stock is now trading at the lowest multiple in the sector (except for CCA), the company’s wireless network and distribution are in better shape and wireless contribution to consolidated results is becoming more prominent.”

He did, however, lowered his target price for Shaw shares to $31 from $31.50. The average target on the Street is currently $29.09, according to Bloomberg data.

“The company reported weak wireline results in FY18, but we believe results should rebound on improving subscriber metrics in FY19 as it adapts to the competitive landscape,” he said. “Wireless is now an increasingly larger contributor to consolidated EBITDA and is currently growing at 50 per cent annually as a result of market share gains; we believe that margins will start improving again in FY19. Indebtedness remains reasonable, which provides the company with flexibility to continue deploying an aggressive wireless strategy.”

Mr. Yaghi also made the following target prices adjustments to Shaw’s peers:

Wells Fargo analyst Timothy Willi thinks Shopify Inc. (SHOP-N, SHOP-T) is an “attractive way to invest in both the strong secular growth of digital commerce” as well as significant growth in direct-to-consumer strategies by traditional retailers.

He initiated coverage of the Ottawa-based e-commerce company with an “outperform” rating.

Though he expects revenue growth to moderate from current levels, Mr. Willi thinks it should remain strong, projecting growth of at least 30 per cent over the next 2-3 years with a “clear path to profitability” emerging.

The analyst set a target price of US$175 for Shopify shares, exceeding the consensus of US$160.47.

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Citing both its “defensive characteristics” and its current valuation, Desjardins Securities analyst Doug Young raised his rating for Power Financial Corp. (PWF-T) to “buy” from “hold.”

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“Our thesis is predicated on the following points: (1) its discount to NAV [net asset value] of 20.2 per cent is above its five- and 10-year historical averages of 17.2 per cent and 13.4 per cent, respectively; (2) it trades at 7.6 times our four-quarter-forward EPS estimate vs its historical average of 11.7 times; (3) the dividend yield is attractive at 6.6 times, in our view; (4) it has more defensive characteristics (75–80 per cent of PWF’s NAV relates to GWO [Great-West Lifeco Inc.], which some view as being a more defensive name with a lower sensitivity to equity markets and interest rates),” he said.

Mr. Young’s upgrade came in conjunction with the release of the firm’s 2019 outlook for the Canadian financial services sector.

He is projecting operating earnings per share growth of 5 per cent in 2019 for Power Financial, versus 7 per cent for Power Financial Corp. (POW-T). He estimates 5-per-cent dividend growth for both.

“We remind readers that the vast majority of PWF’s EPS is a flow-through from its ownership in GWO and IGM [Financial Inc.], and PWF’s dividends are funded by dividends received from these two entities as well,” he said.

“PWF trades largely in line with movements in the share prices of GWO (67.7-per-cent ownership) and, to a lesser extent, IGM (61.4-per-cent ownership). Worth noting, POW owns 65.5 per cent of PWF.”

Mr. Young maintained a $33 target for PWF shares. The average on the Street is currently $33.29.

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In the same report, Desjardins’ Gary Ho lowered his target price for shares of AGF Management Ltd. (AGF-B-T), despite naming it his top pick for 2019 among Canadian asset managers.

“We foresee a few near- or medium-term positive catalysts: (1) net retail flows improving relative to the industry; (2) we expect net sales of global fund categories to outpace domestic categories, and AGF is expected to continue to benefit from this trend; (3) we expect the IPO of S&W in 2020 to create shareholder value for AGF as investors recognize a proper valuation for S&W; (4) with the potential launch of EIF Fund II in 2019, AGF’s alternative platform should start to contribute to earnings; and (5) all of these factors, along with improved management credibility, should lead to better sentiment and valuation,” said Mr. Ho.

In the report, Mr. Ho reduced his market return expectations to 3 per cent in 2019 and 4 per cent in 2020 (down from 5–6 per cent previously).

“We believe this is prudent given the economy is moving into the late-cycle stages,” he said.

With that reduction, his target price for shares of AGF dipped by a loonie to $7 with a “buy” rating (unchanged). The average is currently $6.96.

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He also lowered his target price for Fiera Capital Corp. (FSZ-T, “buy”) to $13.50 from $14, which falls below the consensus of $14.54, and Gluskin Sheff & Associates Inc. (GS-T, “hold”) to $12.50 from $13, versus a consensus of $12.50.

“Asset managers as a group are trading at or near trough multiples as investors fear a near-term market correction,” said Mr. Ho. “This will likely persist until the macro outlook turns decisively positive and/or industry net flows rebound materially. Dividends are safe and attractive in our view, which should provide some downside support to share prices.”

“In our view, the company’s well-established distribution and logistics operation and rapidly expanding direct-to-consumer delivery business can be leveraged to drive substantial product sales growth, as DYME ramps production capacity for its in-house brands,” he said. “ We believe our estimates are de-risked somewhat by limiting our forecast to the company’s CA and OR operations, where DYME is expanding.

“We note that following the recent capital raise and with a commitment for a $25-million credit facility, the company is well capitalized to fund near-term capex needs in these states. As such, we believe events demonstrating tangible progress toward expansion into additional states can act as positive catalysts for our estimates and DYME’s shares in future periods. Nevertheless, our expectations for DYME within its core markets are robust, calling for an 89-per-cent revenue CAGR [compound annual growth rate] from 2018-2020, with revenue and EBITDA in 2020 estimated at $250-million and $50-million, respectively. Further, within our more conservative framework, valuation appears to offer upside, with the stock trading at 3.0 times 2020 estimated enterprise value-to- EBITDA, compared to a 6.8-times average multiple for the U.S. peer group.”

Currently the lone analyst on the Street covering the stock, Mr. Burleson set a target of $5 per share.

In a separate note, Mr. Burleson also initiated coverage of Tilt Holdings Inc. (TILT-CN), a cannabis company based in Cambridge, Mass., with a “speculative buy” rating and a $6 target.

“The company is well positioned to build a substantial cannabis operation across multiple U.S. states and internationally,” he said. “TILT is implementing a differentiated approach to building a dispensary network, wholesaling in-house and third-party brands through a franchise-like model that provisions turn-key cannabis infrastructure to license holders in exchange for retail shelf space and stocking fees. We believe this “affiliate” model should allow TILT to rapidly scale its dispensary network across multiple states, while limiting capex and maximizing cash flow. In addition, looming acquisitions of Jupiter Research (a leading vape hardware supplier) and Blackbird (wholesale distribution and home delivery) should accelerate growth and enhance synergies across the platform, allowing TILT to bring incremental value to Baker Technology’s 1,200 dispensary customers through wholesale distribution capabilities and captive vape product. We also believe demand trends across the Baker network will provide TILT with insights useful in the expansion and operation of its own dispensaries, driving informed decisions on product development and positioning, as well as better operational efficiency.”

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Canaccord Genuity analyst Yuri Lynk named Aecon Group Inc. (ARE-T) his best idea for 2019, citing “its minimal exposure to commodity end-markets, a record book of business that virtually covers our 2019 revenue estimate, $7.00 per share in net cash, and a deeply discounted valuation multiple.”

With a “buy” rating (unchanged), he increased his target price for its shares to $24 from $23, which tops the consensus of $22.25.

“In our view, the dramatic improvement witnessed in the Aecon investment case this year is not adequately reflected in the stock price,” the analyst said. “Recall, since January, the company has won a record amount of work such that its 62-per-cent year-over-year backlog growth is best-in-class among North American peers. A number of the largest bookings were P3s, boosting the outlook of the Concessions segment. Lastly, the company sold its capital intensive and deeply cyclical contract mining business in the oil sands, bolstering the balance sheet.”

He added: “Aecon’s construction business trades at 3.1 times our 2019 EBITDA estimate, 38 per cent below its North American peers at 5.0x. We view this discount as unwarranted given Aecon’s best-in-class backlog and FCF per share growth, its fortress-like balance sheet, and compelling 3-per-cent dividend yield.”

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